The role of country governance on value-added tax and inequality

79 4, XXI, 2018 Economics DOI: 10.15240/ ul/001/2018-4-006 In oduc ion Rising income inequali y is a g owing conce n o go e nmen s due o i s ad e se e ec on he po e y le el, income dis ibu ion, social and ins i u ional s abili y, which in u n impede he economic g ow h and may lead o poli ical ins abili y. Taxa ion has long been ega ded as he key ins umen in a i scal policy o educe income inequali y ia he edis ibu ion o ax e enues o i nance public goods and o co ec o ma ke -income inequali y (A kinson, 1991). Al hough p io s udies ha e ex ensi ely in es iga ed he e ec o axa ion on income inequali y (Ma inez-Vazquez e al., 2012), he i ndings a e inconclusi e especially in de eloping coun ies (Bi d & Zol , 2014). The ine ec i e edis ibu ion ole o axa ion in de eloping coun ies is mainly due o i scal co up ion and ax e asion ha dis o he dis ibu ion p ocess (Richupan, 1984). Consequen ly, a high pe cen age o axes emain uncollec ed; hence, he alue added ax (VAT) sys em becomes he mos popula ool o inc ease i scal e enues in de eloping economies. Ne e heless he use o VAT o educe income inequali y is deba able due o i s eg essi e na u e. This is because lowe income ea ne s pay la ge pe cen age o hei income on consump ion o good and se ices as compa ed o highe income ea ne s (Tai , 1991). Consequen ly, empi ical e idences ound ha VAT widens income inequali y (see Leahy e al., 2011; Ma inez-Vazquez e al., 2012). Despi e o his eason, VAT gene a es a subs an ial po ion o ax e enue in nea ly 130 coun ies (Keen & Min z, 2004) and a qua e o he wo ld’s ax e enue (Bye e al., 2012). Besides, VAT is also ound o educe income inequali y in de eloped coun ies (Bye e al., 2012). This becomes an open deba e on he implemen a ion o VAT because dis o iona y collec ion o axes a ec s economic g ow h ad e sely (Na ayanan, 2014); hence, coun ies a ound he globe ha e eso ed o e o m hei ax policy by implemen ing he VAT sys em. The e o e, his s udy seeks o examine he impac o VAT on income inequali y so as o es ablish he iabili y o such policy in educing he income inequali y as claimed by he poli icians and p io empi ical s udies. This s udy p o ides an insigh o he policy make s on he easibili y o he VAT sys em o achie e a be e income dis ibu ion han he adi ional pe sonal income ax and co po a e ax sys ems. In addi ion, he coun y go e nance had been widely documen ed as a key con ibu o o he success ul implemen a ion o VAT (La Po a e al., 1999). Economis s ag ee ha go e nance is a c i ical ac o in explaining he pe o mance a ia ions ac oss di e en coun ies because i a ec s esou ces alloca ion. The e o e, good go e nance con ibu es o a good ax sys em, which is i al o ax dis ibu ion p ocess o educe income inequali y. In addi ion, he ax s uc u e is highly esponsi e o a go e nance s uc u e ha enhances he collec ion o ax o be dis ibu ed o he p oduc i e sec o s, as Bi d and Zol (2008) sugges ed. We u he in es iga e he impac o VAT on income inequali y in de eloped and de eloping coun ies by adding he ole o coun y go e nance in ou esea ch model. We spli he sample in o de eloped and de eloping coun ies. We a gue ha a ying le el o economic de elopmen con ibu es o he di e en ial impac s o VAT on income inequali y. To he bes o ou knowledge his is he i s a emp o examine he e ec o coun y go e nance on he link be ween VAT and income inequali y. Ou esea ch ocuses on coun ies wi h VAT sys em o de e mine he go e nance ac o s ha could imp o e he link be ween VAT and income inequali y. In doing so, ou THE ROLE OF COUNTRY GOVERNANCE ON VALUE-ADDED TAX AND INEQUALITY Sok-Gee Chan, Zulku l y Ramly EM_4_2018.indd 79EM_4_2018.indd 79 28.11.2018 13:12:5428.11.2018 13:12:54 80 2018, XXI, 4 Ekonomie i ndings enhance he unde s anding o his link among he policy make s and unde sco e he impo ance o imp o ing he coun y go e nance o ealize he posi i e e ec o he VAT on income equali y. Ou i ndings p o ide insigh s o be e policy implemen a ion by iden i ying a se o go e nance ac o s ha con ibu e o g ea e e i ciency and e ec i eness o VAT as a ool o income dis ibu ion in di e en en i onmen se ups (e.g., de eloped e sus de eloping economies). We seek o iden i y a sound ins i u ional amewo k ha can be u ilized by go e nmen s o mi iga e he de imen al e ec s o he VAT sys em. We belie e ha he quali y o coun y go e nance a ec he esou ce alloca ion and income dis ibu ion because i se es as an incen i e o he egula o s o implemen policies ha a e bene i cial o he na ion. We make an impo an con ibu ion o policy implemen a ion wi h ega d o axa ion, in pa icula , he VAT sys em despi e i s eg essi e na u e and i s po en ial ha m ul e ec o he economy. Ul ima ely, we in oduce a model o he e ec i e implemen a ion o he VAT o na ow income inequali y. 1. Li e a u e Re iew and Hypo hesis De elopmen 1.1 VAT and Income Inequali y VAT has been widely used since he 1960s in mo e han 160 de eloped and de eloping na ions. The use o VAT enhances he e i ciency and e ec i eness o he o e all axa ion sys em (Keen & Lockwood, 2010; Na ayanan, 2014) o i nance socioeconomic de elopmen , i nance bigge go e nmen , and educe ade de i ci s (Mi chell, 2005). VAT is ound o inc ease he o al ax e enue in bo h de eloped and de eloping economies, o example in New Zealand VAT p oduced 18% o he o al ax e enue (Hajek, 2001) and mo e han 50% in Slo ak Republic (Banocio a, 2009). Ne e heless, he use o VAT as a ool o e enue gene a ion is highly deba able on he poli ical desk. The p oponen s o VAT claim ha i is less damaging o he coun y’s economy because i is cha ged a a uni o m and ela i ely low a e. Fu he mo e, VAT enables he go e nmen o gene a e mo e e enue o i nance he coun y’s g ow h wi h g ea e in es men in public in as uc u e, educa ion, wel a e, heal hca e, and na ional secu i y (Mi chell, 2005), which a e i al o educe he inequali y in he economy. Yang and Zhou (2011) ound ha unde aking ax e o m by implemen ing an indi ec ax such as VAT as he main ax sys em in China na owed he gap be ween he u ban and u al income. This is suppo ed by A i-Yonah (2014) on he use o VAT o i nance mo e social p og ams in Ame ica o educe he income inequali y. Ne e heless, he impac o VAT is deba able due o i s eg essi e na u e. Consequen ly, VAT nega i ely a ec s income dis ibu ion because he lowe income households spend a highe pe cen age o hei income on VAT han he high income households, hus widening he income gap. Ba e and Wall (2006) ound suppo o his asse ion in hei s udy o he dis ibu ional impac o VAT om 2000 o 2004 in I eland. Leahy e al. (2011) also ound ha lowe income households we e g ea ly a ec ed by he VAT. In addi ion, Poble e (2010) obse ed ha he po e y and income dis ibu ion in Chile imp o ed and income ax inc eased a e a cu in he VAT a e. Simila ly, Mussa (2014) ound ha expanding he ze o a ing co e age and exemp ion on ood, heal h and educa ion con ibu ed o be e po e y educ ion and na ows he income inequali y. This was possibly due o he ac ha wi hou such c ucial exemp ions he households om lowe income g oup spend highe pe cen age o hei income on VAT han highe income g oups. H1: Highe VAT e enue inc eases income inequali y. 1.2 The Mode a ing Role o Coun y Go e nance Coun y go e nance is an impo an elemen in a aining an e ec i e and e i cien o mula ion and implemen a ion o go e nmen policy, pa icula ly in he edis ibu ion o ax collec ions. Acco ding o Tanzi and Chu (1992), a coun y wi h high g ow h a e may ail o educe income inequali y due o he impai men o he edis ibu i e go e nmen policy. P io s udies ound ha coun ies wi h a high le el o co up ion end o ha e lowe collec ion o ax e enues. A high le el o co up ion educes he s a e’s abili y o alloca e unds gene a ed om ax collec ion o he be e men o he socie y (Tanzi & D oodi, 1997) and causes signi i can leakages in ax e enue (Ajaz & Ahmad, 2010). S udies ha e obse ed ha ising co up ion inc eases income inequali y in Asia (Li e al., 2000), A ica (Kwabena, 2002), Middle Eas e n coun ies (Imam & Jacobs, 2007), and a ious EM_4_2018.indd 80EM_4_2018.indd 80 28.11.2018 13:12:5528.11.2018 13:12:55 81 4, XXI, 2018 Economics coun ies (Gup a e al., 2002). Meanwhile, Adams and Klobodu (2016) ound ha con ol o co up ion and highe anspa ency lowe ed income inequali y in he Sub-Saha an A ican coun ies. Ins ead o ocusing on co up ion, we include a ious measu es o coun y go e nance. E en hough coun y go e nance is widely ecognized as a ool o mo e e i cien and e ec i e ax dis ibu ion o educe income inequali y, he empi ical e idence is scan (E e es -Phillips & Sandall, 2009). As La Po a e al. (1999) sugges ed ha he quali y o go e nance is i al in de e mining he success o go e nmen pe o mance. Be e go e nance con ibu es o economic s abili y and leads o highe i nancial de elopmen , which in u n inc eases ax esou ces (Ajaz & Ahmad, 2010). Besides, Suma o e al. (2003) ound ha poo go e nance ad e sely a ec ed he po e y educ ion e o s o he Indonesian go e nmen . Muinelo-Gallo and Mi anda (2014) and Ky iacou e al. (2017) ound ha coun y go e nance is necessa y o educe he income inequali y gi en he i scal decen aliza ion. Simila ly, Chen and Kinkyo (2016) also ound ha good go e nance is a c i ical ac o o educe income inequali y. On he o he hand, Ak am e al. (2011) obse ed ha coun y go e nance was posi i ely ela ed o po e y in he long un bu no in he sho un. Thus, we o e ou second hypo hesis, as ollows: H2: Highe VAT e enue educes income inequali y in coun ies wi h highe quali y go e nance. 2. Me hodology 2.1 Empi ical Model We i s s udy he impac o alue-added ax on income inequali y using he sys em Gene alized Me hod o Momen s (GMM) as shown in Equa ion (1), which is he base equa ion in ou s udy. We de i ed he equa ion based on he g ow h model. i VAT i Inequali y i Inequali y    2110  i In es men i In la ion i CapGDP  54 / 3   i Li e acy i FinDe i T ade  876  i e yea C isisD i Go Exp  )( 19  (1) Whe e i h e e s o he indi idual coun y and is he ime pe iod in ol ed. Ou dependen a iable is income inequali y (Inequali y), measu ed by he Gini coe i cien . Income inequali y e e s o dis ibu ion o money income, which has implica ions o a na ion’s economic heal h and policy. The Gini coe i cien measu es he dispe sion o he income on a scale be ween 0 and 1 whe e he coe i cien o 1 indica es a pe ec income inequali y, whe eas a lowe coe i cien indica es g ea e income equali y. The a iable o in e es in his s udy is VAT, which is he a io o VAT collec ion o go e nmen e enue. This a io is a subs i u e o he VAT a e due o una ailabili y o he a e in a ime-se ies manne . In addi ion, using he a io o VAT collec ion o go e nmen e enue enables us o assess he commi men o he go e nmen owa ds he implemen a ion o VAT as a ool o gene a e e enue o unding he coun y economic de elopmen . We p edic ha VAT is posi i ely ela ed o income inequali y due o i s eg essi e na u e. Pu ing i di e en ly, we hypo hesize ha highe VAT e enue widens income inequali y. We con ol o GDP pe capi a (GDP/Cap), in l a ion (In l a ion), in es men (In es men ), ade openness (T ade), i nancial de elopmen (FinDe ), li e acy a e (Li e acy), and go e nmen spending (Go Exp) which in l uence income inequali y based on he endogenous g ow h model. The eal GDP pe capi a wi h he base yea o 2010 is he con ol a iable o economic de elopmen . This is impo an o c oss-coun y analysis as he di e en coun ies a e cha ac e ized by di e en economic de elopmen . Highe eal GDP pe capi a e l ec s highe a e age disposable income pe indi idual household, which lowe s he income inequali y. In l a ion is a con ol a iable ha cap u es he e ec o he mac oeconomic policy en i onmen . An e ec i e mac oeconomic policy makes an in l a iona y episode in he coun y mo e s able and hence educes he income inequali y. This is because in l a ion leads o inc eases in p ices ha esul in declines in eal income (Tanzi, 1977). We also con ol o he e ec o in es men , which is measu ed by he a io o g oss capi al o ma ion o GDP. A highe a io educes income inequali y due o highe a e age p oduc i i y among indi iduals. We also used ade openness o e l ec he deg ee o exposu e o an economy o ex e nal economic shocks. Highe ade openness may inc ease o educe income inequali y; i may also inc ease ade i i i i i i i i i i i EM_4_2018.indd 81EM_4_2018.indd 81 28.11.2018 13:12:5528.11.2018 13:12:55 82 2018, XXI, 4 Ekonomie in eg a ion o he coun y, which would inc ease income inequali y (Milano ic & Squi e, 2007). In addi ion, we employ i nancial de elopmen o e l ec he deg ee o ma ke in eg a ion due o dynamic globaliza ion and libe aliza ion. The li e acy a e measu es he educa ion le el o he indi iduals as well as human capi al de elopmen o a coun y. Highe educa ion le el educes income inequali y due o he “comp ession” e ec (Knigh & Sabo , 1983). Acco ding o Zhang (1996), a highe educa ion le el enhances labo skills ha will lead o an inc ease in a e age income and he e o e na ows income inequali y. The a io o go e nmen spending o GDP cons i u es a majo sou ce o income dis ibu ion owa ds he economic de elopmen and social wel a e. E ec i e and e i cien go e nmen spending on wel a e (educa ion and heal h) con ibu es o highe human capi al de elopmen , which inc eases he employmen oppo uni ies in he economy (Sha i que & Haq, 2006) and, e en ually, na owing income inequali y gap. Finally, i is impo an o con ol o economic c ises (C isis) because hey lead o ex e nal shocks ha hinde economic de elopmen and dis o economic policy implemen a ion. Also, economic c ises inc ease he unemploymen a e due o he slowdown in he demand o goods and se ices and, hus, ul ima ely widen income inequali y. Following In’ai a (2014) we use ini ial GDP as he ins umen al a iable in ou es ima ion o co ec o he endogenei y issues pe aining o he GDP pe capi a, in l a ion, in es men and ade. The economic condi ion and in es men la gely depends on he coun y’s pe o mance. Nex , we add he in e ac ion e ms be ween coun y go e nance a iables and VAT, as shown in Equa ion (2) o s udy he e ec o he quali y o a coun y’s go e nance in imp o ing ax collec ion e i ciency and educing income inequali y in which Go i is he di e en ypes o coun y go e nance ha we ob ained om he In e na ional Coun y Risk G oup (ICRG). (2) Acco ding o Ak am e al. (2011), good go e nance is bene i cial o educing po e y and income inequali y because i minimizes abuses o powe by he au ho i ies. This is especially ue in de eloping coun ies whe e ins i u ional p oblems a e he majo obs acles in ax collec ion ha hinde he coun y’s de elopmen (Ajaz & Ahmad, 2010). Bi d and Zol (2008) o e ed suppo o his asse ion when hey epo ed ha he ax s uc u e and e i ciency a e highly esponsi e o he coun y’s go e nance, which a ec s he abili y o he economy o ul i ll social obliga ions. Fu he mo e, good coun y go e nance is e i cien in p o ec ing p i a e p ope y, able o boos economic ac i i ies and mac oeconomic s abili y and e ec i e in managing social con l ic s o achie e sus ainable economic g ow h. In his case, we expec α10 o educe income inequali y and α11 is he pa ame e s o be es ima e o he in e ac ion e ms o coun y go e nance wi h VAT collec ion whe e we expec o be posi i e i he coun y go e nance helps o mi iga e he eg essi e impac o VAT and enhance income dis ibu ion. We employ wo-s ep sys em GMM o es ima e Equa ions (1) and (2) because income inequali y is no a andom walk whe e he pe o mance o he coun y depends on i pas pe o mance. The e o e, sys em GMM helps o co ec o he au oco ela ion in income inequali y. The GMM echnique is supe io in add essing po en ial endogenei y, he e oskedas ici y, and au oco ela ion p oblems (Doy ch & Uc um, 2011). Fu he mo e, sys em GMM p o ides mo e e i cien es ima es when he ins umen s used a e weak (Blundell & Bond, 1998). The sample o his s udy consis s o 105 coun ies om 1984 o 2014. The mac oeconomic da a a e ob ained om Thomson Da as eam whe eas he da a o coun y go e nance a e om he ICRG da abase. We u he spli he sample in o de eloped and de eloping coun ies o s udy he di e en ial impac o VAT on income inequali y in such coun ies due o he di e ences in he objec i e o VAT and go e nmen policies. The lis o de eloped and de eloping coun ies is om om he Uni ed Na ions Economic and Social Council o he Gene al Assembly. 3. Resul s and Discussions We use wo-s ep sys em GMM es ima ion o ob ain he s anda d obus es ima ion in EM_4_2018.indd 82EM_4_2018.indd 82 28.11.2018 13:12:5528.11.2018 13:12:55 83 4, XXI, 2018 Economics de e mining he impac o VAT on income inequali y and he mode a ing ole o he coun y’s go e nance in he link be ween VAT and income inequali y o he ull sample, de eloped coun ies, and de eloping coun ies. Tab. 2 shows he es ima ed esul s o he ull sample. Tabs. 3 and 4 p esen he es ima ed esul s o de eloped and de eloping coun ies, espec i ely. Ou base model is Model 1, in which we examine he main e ec o VAT on income inequali y. Models 2 h ough 8 p esen he mode a ing e ec o he coun y go e nance. Resul s om Model 1 in Tab. 2 indica e ha VAT inc eases income inequali y a a 5% signi i cance le el, which suppo s he a gumen ha VAT is eg essi e in na u e. This esul is in line wi h he s udies o Leahy e al. (2011) and Ma inez-Vazquez e al. (2012). In e ms o economic signi i cance, an inc ease in VAT e enue as measu ed by he a io o VAT collec ion o go e nmen e enue by one (sample) s anda d de ia ion inc eases income inequali y by 0.29 pe cen age poin s, which is a ela i ely small e ec . Ne e heless, he signi i can impac o VAT on income inequali y in de eloped coun ies is benign (Tab. 3) and VAT educes income inequali y in de eloping coun ies a 1% signi i cance le el (Tab. 4). This i nding suppo s ou i s hypo hesis ha highe VAT e enue inc eases income inequali y bu no in de eloping economies. VAT may inc ease e enue collec ion in de eloping coun ies in i nancing ans e s and p o ision o public goods, which esul s in educ ions in income inequali y in he de eloping coun ies as compa ed o de eloped coun ies which al eady ha e a well-es ablished and e i cien ax collec ion p ocess. This i nding co obo a es he esul o A i-Yonah (2014), which ound ha VAT o i nance social p og ams educed income inequali y and led o highe economic g ow h (Magu, 2013). Nex , we i nd ha highe quali y bu eauc acy educes income inequali y a a 5% signi i cance le el, hus, suppo ing ou asse ion ha highe quali y bu eauc acy mi iga es he eg essi e e ec o VAT. The esul s a e consis en o he ull sample, de eloped coun ies and de eloping coun ies. Hence, his i nding sugges s ha imp o ing he quali y o bu eauc acy is c i ical o spu he de elopmen p ocess by minimizing inciden s o abuse o powe by go e nmen o i cials and he nega i e in l uence o poli ical mas e s in he go e nmen machine ies, pa icula ly in ax e enue alloca ion, hus educing income inequali y. We also i nd ha high le el o co up ion con ol educes income inequali y a a 1% signi i cance le el (Model 3), which is in line wi h he common expec a ion ha an e ec i e co up ion con ol enhances he go e nmen e i ciency (Mau o, 1997). Con e sely, poo co up ion con ol dis o s he alloca ion o go e nmen i nancial esou ces, ul ima ely ad e sely a ec ing he dis ibu ion o income (see Gup a e al., 2002). The esul s a e consis en ac oss he h ee samples as shown in Tab. 2. Ou esul s also sugges ha highe VAT e enue and a highe le el o co up ion con ol educe income inequali y in bo h de eloped and de eloping coun ies. This is consis en wi h he i ndings o Li e al. (2000) in Asia, Kwabena (2002) in A ica, Imam and Jacobs (2007) in Middle Eas e n coun ies, and a c oss-coun y analysis by Gup a e al. (2002). As highligh ed by Tanzi and D oodi (1997), a lowe le el o co up ion due o an e ec i e co up ion con ol enhances he alloca ion o unds gene a ed by ax collec ion o he socie y’s well-being and educes he leakages in ax e enue (Ajaz & Ahmad, 2010). Thi d, in e ms o democ a ic accoun abili y he esul o Model 4 om Tab. 2 shows ha he in e ac ion be ween democ a ic accoun abili y and VAT e enues educes income inequali y. This i nding indica es ha ensu ing ee and ai elec ions and esponding o he needs o he people a e no su i cien o na ow he income gap be ween he poo and he ich in de eloping coun ies. This is easy o unde s and because go e nmen s mus ha e adequa e i nancial esou ces and be highly esponsi e o he needs o he people o ensu e ha he people ha e access o a good educa ion, public ameni ies, quali y heal hca e, and g owing economic ac i i ies and, hus, enjoy g ea e access o he weal h o he na ion which seems o be weak in de eloping coun ies. Ne e heless, we obse e ha he in e ac ion e m o VAT e enue and democ a ic accoun abili y educe income inequali y in bo h de eloped and de eloping coun ies. This i nding sugges s ha democ a iza ion imp o es income dis ibu ion as educa ed indi iduals ha e mo e oice in public decisions and, hence, a e able o edis ibu e esou ces o he poo mo e e i cien ly (Chong & Calde ón, 2000). EM_4_2018.indd 83EM_4_2018.indd 83 28.11.2018 13:12:5528.11.2018 13:12:55 84 2018, XXI, 4 Ekonomie The oice o educa ed indi iduals is e en mo e c ucial in implemen ing he VAT because i is iewed as a highly eg essi e ax accompanied by he go e nmen ’s p omise o imp o e he socie y’s economic well-being wi h be e ax collec ion. Fou h, Model 5 o Tab. 1 shows he in e ac ion e m o he VAT e enue and he go e nmen s abili y educes income inequali y in bo h de eloped (1% signi i cance le el) and de eloping coun ies (5% signi i cance le el). These esul s indica e ha go e nmen s in de eloped economies a e be e able o implemen policies and p og ams as decla ed han de eloping economies, which a e o en cha ac e ized by ine i ciency in he alloca ion o esou ces due o ma ke asymme y. Simila o ou esul s on democ a ic accoun abili y (in e ms o he main e ec and economic signi i cance), he esul on go e nmen s abili y shows ha high s abili y in he go e nmen o he day is no an impo an ac o in na owing he income gap, bu i s combina ion wi h highe go e nmen i nancial esou ces in e ms o highe collec ion o he VAT e enue c ea es he desi ed e ec . Fi h, he esul o Model 6 in Tab. 1 sugges s ha he combina ion o highe VAT e enue and high-quali y law and o de na ows he income gap in ou sample coun ies a a 1% signi i cance le el. Ou esul implies ha an e ec i e and impa ial legal sys em enhances he dis ibu ion o go e nmen i nancial esou ces by ensu ing ha abuse o powe inciden s a e deal wi h se iously, hus minimizing leakage in he go e nmen de elopmen expendi u e due o unsc upulous beha io . In con as , law and o de does no signi i can ly mode a e he e ec o VAT e enue on income inequali y in de eloping coun ies. We eckon ha his con as ing esul may be due o he well-es ablished, s onge , and mo e impa ial legal sys em in de eloped coun ies o minimize misalloca ion o VAT e enue and ensu e i s u iliza ion o economic ac i i ies o p omo e mo e equi able dis ibu ion o income o ea o legal ep isal. The weak e ec in de eloping coun ies may due o weake legal sys em ha opens up oppo uni y o abuse o powe and ailu e o implemen bene i cial policies o he people. Six h, we ound ha he in e ac ion e m be ween poli ical isk and VAT e enue educes he income inequali y by 7.90% (Model 7) and i is s a is ically signi i can a a 1% le el o bo h de eloped and de eloping coun ies. This i nding implies ha high poli ical s abili y enables he go e nmen o ocus on de ising and implemen ing de elopmen and economic p og ams o na ow income inequali y. We i nd ha he in e ac ion e m o VAT e enue and he poli ical isk a ing educes income inequali y a 10% signi i cance le el. This esul sugges s ha highe VAT e enue weakens he posi i e e ec o low poli ical isk on income inequali y in all ou samples. This may due s able poli ical en i onmen enables he go e nmen o ope a e wi h g ea e la i ude o implemen economic and de elopmen p og ams wi h ce ain y, he impac is minimal i he go e nmen has s ong poli ical powe and s abili y o ocus on cha ing and s ee ing he na ions’ economic and de elopmen s a egies unin e up ed by poli ical and social noise. Poli ical and social ensions can de ail a go e nmen ’s abili y o pe o m i s du y o he people e en when he i scal posi ion is s ong. This is suppo ed by Aizenman and Jinja ak (2008), who highligh ed ha g ea e poli ical s abili y inc eases he e i ciency o ax collec ion and, hence, inc eases he esou ces de o ed o ax en o cemen o he bene i o social well-being. Finally, in Model 8 o Tab. 2, we i nd ha he in e ac ion e m be ween socioeconomic condi ions and VAT e enues educes income inequali y a a 1% signi i cance le el in de eloped economies. Fa o able socioeconomic condi ions such as low unemploymen , obus consume con i dence, and low po e y educe income inequali y by 1.32%. This esul is no su p ising because socioeconomic condi ions a e di ec ly ela ed o he indi idual and household le el o income and dis ibu ion o weal h (OECD, 2012). Fu he mo e, we obse e ha he in e ac ion e m o VAT e enue and socioeconomic condi ions has a ma ginally signi i can nega i e ela ionship wi h income inequali y a a 10% le el. Ou i nding sugges s ha imp o ing socioeconomic condi ions alone has a s onge impac in educing he income gap. Howe e , implemen a ion o he VAT sys em ha adds o he go e nmen ax e enue appea s o weaken his impac om he s a is ical poin o iew. This i nding implies ha go e nmen should ocus on implemen ing policies ha can boos employmen oppo uni ies o imp o e he socioeconomic condi ion pa icula ly in EM_4_2018.indd 84EM_4_2018.indd 84 28.11.2018 13:12:5628.11.2018 13:12:56 85 4, XXI, 2018 Economics lowe income g oup o bene i s om he VAT implemen a ion (OECD, 2012). Howe e , we obse e a con as ing esul o he de eloping coun ies in which he socioeconomic condi ions posi i ely mode a e he e ec o VAT e enue and income inequali y a a 1% le el, which we no e seems o d i e he esul o he ull sample (i.e., ma ginal mode a ing e ec only). The s a e o he socioeconomic condi ions in de eloping coun ies u he exace ba es he nega i e e ec o he VAT e enue on income inequali y ha we obse e in he ull sample as well as in bo h he de eloped and de eloping coun ies samples. Pu ing i di e en ly, he socioeconomic condi ions mode a e he e ec o VAT e enue on income inequali y in de eloping coun ies bu in a nega i e way. In con as , he s a e o socioeconomic condi ions in he de eloped coun ies e e ses he nega i e e ec o VAT e enue on income inequali y, which is a desi able ou come. This i nding sugges s ha s able socioeconomic condi ions indica e a low deg ee o socioeconomic p essu e and social dissa is ac ion ha enable he go e nmen o ocus on implemen ing VAT e enue alloca ion policies in a way ha educes he income gap be ween he poo and he ich wi hou dis ac ion, he eby ealizing he edis ibu i e e ec o he VAT sys em. Va iable Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Inequali y (-1) 1.033*** (0.012) 0.326*** (0.013) 0.399*** (0.022) 0.381*** (0.015) 0.987*** (0.015) 0.984*** (0.022) 0.753*** (0.024) 0.889*** (0.005) VAT 0.004** (0.002) 2.220** (1.059) 0.388 (0.345) 67.074*** (17.33) 0.088** (0.036) 1.035*** (0.259) 1.570* (0.917) 0.586 (0.357) GDP/Cap 0.238*** (0.038) 0.351*** (0.113) 0.633*** (0.242) 0.511** (0.228) 0.231 (0.143) 0.124 (0.153) 0.126 (0.177) 0.032*** (0.010) In l a ion -0.103*** (0.014) 0.044 (0.045) -0.086 (0.103) -0.023 (0.084) 0.017 (0.063) 0.003 (0.057) 0.093 (0.088) -0.030*** (0.003) In es men 1.313 (0.906) 16.676*** (2.487) 17.339*** (3.195) 16.162*** (3.179) 5.384** (2.679) 4.085 (2.512) 0.764 (3.125) 2.573*** (0.645) T ade -0.793** (0.346) -1.808* (1.015) -0.972 (0.953) -0.446 (1.050) -0.587 (0.571) -0.206 (0.512) -4.146*** (0.752) -0.639*** (0.136) FinDe 1.189*** (0.195) 6.187*** (0.858) 4.458*** (0.925) 4.335*** (0.904) 0.894* (0.496) 1.437** (0.606) 2.136** (0.846) 2.921*** (0.113) Li e acy -1.839*** (0.517) -3.147*** (0.997) -4.515** (1.775) -6.742*** (1.445) -3.610** (1.540) -3.032* (1.546) -3.062** (1.205) -1.314*** (0.259) Go Exp -0.229 (1.561) -84.785*** (6.894) -75.877*** (9.599) -82.290*** (9.225) -6.332** (2.807) -5.981** (2.802) -5.921 (5.252) -9.807*** (0.365) C isis 0.994*** (0.195) 2.200*** (0.522) 0.578 (0.911) 1.159 (0.810) 0.297 (0.370) 0.552 (0.365) 3.412*** (0.855) 0.901*** (0.059) Bu eauc acy --2.070*** (0.254) ------ VAT* Bu eauc acy --0.905** (0.424) ------ Co up ion -- -1.165*** (0.286) ----- VAT* Co up ion -- -0.174 (0.170) ----- Democ a ic --- 0.653** (0.326) ---- VAT* Democ a ic --- -13.405*** (3.458) ---- Tab. 1: Full sample (Pa 1) EM_4_2018.indd 85EM_4_2018.indd 85 28.11.2018 13:12:5628.11.2018 13:12:56 86 2018, XXI, 4 Ekonomie Va iable Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Gs abili y ---- 0.018 (0.023) --- VAT* Gs abili y ---- -0.008** (0.004) --- Law ----- 0.333 (0.224) -- VAT* Law ----- -0.200*** (0.050) -- Poli ical Risk ------ -0.057*** (0.020) - VAT* Poli ical Risk ------ -0.022* (0.013) - Socioeconomic ------- -0.536*** (0.026) VAT* Socioeconomic ------- -0.086* (0.052) Cons an 3.894*** (0.835) 45.828*** (2.123) 40.045*** (2.793) 36.089*** (2.414) -1.174 (1.769) 0.294 (2.385) 19.185*** (2.782) 8.561*** (0.453) Yea dummy Included Included Included Included Included Included Included Included Model i s Wald chi2 425.00*** 137.18*** 217.17*** 187.223** 297.59*** 456.28*** 573.02*** 240.00*** AR1 -3.16*** -2.06** -2.46** -2.46** -2.95*** -2.92*** -3.38*** -3.14*** AR2 -0.97 -1.34 -1.30 -1.64 -1.06 -1.07 -1.07 -1.17 Sa gan es (p- alue) 52.91 (0.195) 50.21 (0.386) 57.09 (0.948) 55.21 (0.965) 52.50 (0.966) 48.96 (0.986) 43.10 (0.594) 59.55 (0.122) No. o Ins umen s 85 90 118 118 115 115 88 90 No. o Obse a ions 2,129 2,129 2,129 2,129 2,129 2,129 2,129 2,129 Sou ce: own No e: This able gi es he eg ession es ima ion esul s based on wo-s age GMM. Inequali y e e s o he Gini coe i cien in pe cen age; VAT is he pe cen age o alued-added ax o GDP; GDP/Cap is he na u al loga i hm o eal GDP pe capi a; In l a ion is he pe cen age o in l a ion a e; In es men is he pe cen age o eal g oss capi al o ma ion o GDP a io base yea o 2010; T ade is he a io o ade openness; FinDe is he a io o p i a e c edi o GDP; Li e acy is he li e acy a e measu ed in pe cen age; Go Exp is he pe cen age o go e nmen expendi u e o GDP; C isis i he dummy a iable assigned o economic c isis (1 = c isis yea ; o he wise, 0); Bu eauc acy e e s o bu eauc acy quali y; Co up i- on e e s o he co up ion index; Democ a ic e e s o democ a ic accoun abili y; Gs abili y e e s o go e nmen s abili y; Law e e s o law and o de ; Poli ical isk e e s o poli ical isk a ing; Socioeconomic e e s o socioeconomic condi ions. * ep esen s signi i cance a 10%, ** ep esen signi i cance a 5%, *** ep esen signi i cance a 1%. Tab. 1: Full sample (Pa 2) EM_4_2018.indd 86EM_4_2018.indd 86 28.11.2018 13:12:5628.11.2018 13:12:56 87 4, XXI, 2018 Economics Va iable Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Inequali y (-1) 1.025*** (0.015) 1.026*** (0.038) 0.954*** (0.028) 0.984*** (0.029) 0.985*** (0.022) 0.946*** (0.031) 0.977*** (0.030) 0.938*** (0.036) VAT 3.478 (3.184) 11.468** (5.565) 10.100 (9.174) 27.775** (13.025) 11.475 (7.378) 25.591** (9.869) 20.594** (8.974) 16.669*** (6.364) GDP/Cap 0.425*** (0.047) 0.896*** (0.192) 0.474** (0.225) 1.271*** (0.213) 1.074*** (0.194) 1.268*** (0.162) 1.196*** (0.179) 0.914*** (0.330) In l a ion -0.325*** (0.018) -1.902** (0.767) 0.215 (0.138) 0.052 (0.112) -0.025 (0.080) 0.135 (0.099) 0.111 (0.089) -0.206 (0.684) In es men 5.129*** (0.950) 3.528 (3.096) 6.913*** (2.618) 13.483*** (3.216) 8.814*** (2.665) 10.080*** (2.459) 12.651*** (3.579) 6.741*** (2.588) T ade -3.686*** (0.575) -0.455 (0.315) -0.132 (0.352) -0.307 (0.269) -0.154 (0.186) -0.571** (0.250) -0.280 (0.240) -0.445 (0.295) FinDe -0.289 (0.228) -1.475*** (0.446) -0.933** (0.433) -0.449 (0.551) -0.618* (0.368) -0.241 (0.435) -0.344 (0.484) -0.060 (0.631) Li e acy 20.435*** (6.934) 1.205 (1.828) 5.722** (2.511) 1.868 (2.820) 3.117 (1.911) 2.248 (2.656) 2.980 (2.558) 5.971** (2.635) Go Exp -21.266*** (2.375) -18.871*** (5.706) -17.056*** (3.471) -21.226*** (5.098) -8.889*** (2.728) -19.242*** (3.455) -18.879*** (3.514) -24.304*** (6.760) C isis 0.368*** (0.121) 1.590*** (0.488) 0.073 (0.525) 0.415 (0.527) 0.613 (0.520) 0.273 (0.492) 0.404 (0.444) 1.533*** (0.472) Bu eauc acy - 0.494* (0.292) ------ VAT* Bu eauc acy --0.017*** (0.004) ------ Co up ion - - -0.045 (0.167) ----- VAT* Co up ion - - -0.013*** (0.003) ----- Democ a ic - - - -0.216 (0.136) ---- VAT* Democ a ic - - - -0.009*** (0.002) ---- Gs abili y ---- -0.203*** (0.058) --- VAT* Gs abili y ---- -0.006*** (0.001) --- Law ----- -0.275 (0.185) -- VAT* Law ----- -0.007*** (0.001) -- Poli ical Risk ------ -0.016 (0.014) - VAT* Poli ical Risk ------ -0.001*** (0.000) - Socioeconomic ------- -0.009 (0.063) VAT* Socioeconomic ------- -0.005*** (0.002) Tab. 2: De eloped coun ies (Pa 1) EM_4_2018.indd 87EM_4_2018.indd 87 28.11.2018 13:12:5628.11.2018 13:12:56